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The Federal Reserve Bank of New York and the Securities and Exchange Commission aren’t exactly seeing eye to eye on the plan the SEC has devised to cut the risk in the $2.6 trillion money market mutual fund industry.
A major part of the plan rests on introducing withdrawal fees and obstacles to investor redemptions that the SEC says will reduce the risk of investors heading for the doors at times of market stress. Au contraire, say the Fed economists; the fees-and-gates system that the SEC has devised will instead cause “pre-emptive runs,” as investors worry more about not being able to access their money during a market tempest than about any fees they might have to pay to get it back before the real storm hits and losses become even greater.
The Fed economists said in a blog post that “investors who face potential restrictions on their future access to cash may run when they anticipate that such restrictions may be imposed.”
The SEC knew about the Fed’s reservations when it finalized the new rules — in fact, some of its objections were filed as long ago as last year during this protracted process — but doesn’t seem to share the Fed’s concerns that investors will be out the door at the first sign of trouble. Instead, the commission thinks that its fees-and-gates system will cause investors to leave their money where it is to avoid fees and that the barriers to departure will stem any potential tide of fleeing funds so that any situations have a chance to work themselves out.
Not so, said the Fed; what those obstacles will do is make investors run at the first sign of trouble, rather than waiting around for a potential resolution that might never arrive. The authors had previously released a Federal Reserve Bank of New York staff report making their point back in April.
The Financial Stability Oversight Council has already said it would be keeping an eye on how the new rules work, particularly with regard to “any unintended consequences of liquidity fees and gates.”
Check out Who’s Afraid of the Stock Market? Not JPMorgan’s Kelly on ThinkAdvisor.